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Arab energy giants eye coal imports

Four Gulf Arab states consider importing coal for power as they struggle to meet domestic demand.

By Reuters

Thu 28 Jun 2007 12:00 AM

They hold over 30 % of global oil and nearly 8 % of gas reserves, but at least four Gulf Arab states are considering importing coal for power generation as they struggle to meet domestic demand.

Saudi Arabia, the United Arab Emirates, Oman and Bahrain are all looking at the possibility of building coal-fired power plants, analysts and industry sources said. The region's electricity needs are soaring as petrodollars feed rapid economic expansion.

"It's absurd in a way but there is not enough gas," said Mark Lewis, Managing Director of Energy Market Consultants.

"They have a serious problem in power generation and are having difficulties balancing their systems. Coal is a well known technology and could be built fairly quickly. It's probably quicker than the lead times for importing gas."

Coal was unlikely ever to make up a large part of power generation capacity in the Gulf, but it may help meet some of the rocketing demand, analysts said.

It would also make commercial sense if producers can export the oil they might otherwise burn for power and import coal more cheaply, analyst said.

"This merely reflects the existing commercial realities," said one analyst. "Oil is more expensive than coal. It's a kind of carbon-arbitrage."

The Middle East's coal reserves are negligible, according to the BP Statistical Review. Coal traders and producers said South Africa was the most economic source of coal for the Gulf.

According to data from the World Coal Institute, benchmark London Brent light crude cost five times more than coal last year. Gas was about four times the price of coal. Even adjusting for the lower amount of energy in coal, coal is still far cheaper a fuel source than oil.

Gulf countries have other motives for limiting the burning of gas in power plants. In their drive to diversify economies and create jobs, the region's oil and gas producers have encouraged the growth of energy-intensive industries such as petrochemicals and aluminium.

PLANTS OUTSIDE THE GULF

The high cost of bringing shipping into the Gulf, due to the war-risk premium for insurance in the volatile region, would make coal plants outside the Gulf more economic than any inside it, industry sources said.

Oman was the most likely of the four countries to actually build a coal-fired plant, they said. It is mulling a plant at Raysut, on the Gulf of Oman and outside of the Strait of Hormuz.

The emirate of Fujairah would be the top site for a UAE coal-fired power plant, as it too lies outside the Strait, sources said.

The Paris-based International Energy Agency, adviser to 26 oil consuming countries, said in a report earlier this month that Saudi Arabia was looking at building a plant on its west coast, on the Red Sea.

Saudi Electricity discounted coal as one of the fuels it would use to boost generation capacity in the world's largest oil exporter to 54,000 megawatts by 2015, up from 36,000 MW at the end of last year.

Still, industry sources said the Saudi government, like its neighbours, would consider all options including coal to avoid a power supply crunch. Saudi Electricity has asked industrial users to change working shifts to non-peak power demand hours as it looks to avoid a repeat of last year's blackouts.

Russia is a major exporter of oil, gas and coal to the Atlantic and Pacific markets. Russia has for many years relied on gas for the bulk of its power generation but this year the government announced that it would shift to predominantly coal-fired generation over the next several years.

This will enable Russia to increase its generation capacity substantially and maximise exports of gas which is more expensive than coal.

Tight gas supplies have already led some of the Middle East's cement producers to turn to coal to fire furnaces.

In the UAE's northern emirates of Fujairah and Ras al-Khaimah, cement makers are expected to import around 500,000 tonnes of South African coal during the next six months, up from almost nothing during the past several years.